Volkswagen profitability surges in pot-scandal savings push

Frankfurt - Volkswagen’s profitability surged as turnaround efforts at the struggling namesake car brand gained traction, providing much-needed support to stem an unprecedented financial hit from its diesel-emissions crisis.

First-quarter operating profit widened to 7.8% of revenue from 6.8% a year earlier, the Wolfsburg, Germany-based manufacturer said on Wednesday in a statement.

The improved margin is key as the car maker said it faces a cash outflow in the "double-digit billion-euro range" to pay for damages of the emissions-cheating scandal.

"These quarterly results represent the first tangible results" of Volkswagen’s spending discipline in the wake of the diesel crisis, chief financial officer Frank Witter said in the statement. “We will continue to fight for every single customer.”

The world’s largest automaker is intensifying efforts to rein in bloated costs and revive weak margins at the VW marque, its largest division, to reduce dependence on profits from the Audi and Porsche nameplates and its sprawling Chinese operations. Those efforts, initiated years ago, have intensified since the September 2015 revelation of cheating on diesel emissions tests.

Volkswagen shares declined 0.3% to 143.95 euros as of 9:40 in Frankfurt. The stock has gained 8% this year, valuing the manufacturer at €73bn.

Excluding one-time items, the VW brand posted a 4.6% return on sales, compared with 0.3% a year earlier. Division chief Herbert Diess has set a goal of 4% for the measure by 2020.

The unit signed a landmark labour agreement last year to save €3.7bn in expenses in a renewed savings push, partly in response to the scandal. It has also started to weed out a convoluted reporting structure, including simplifying sales allocations among divisions.

Volkswagen has set aside €22.6bn so far to cover fines, buybacks and repairs stemming from the diesel scandal, with the bulk of those funds flowing out this year.

The financial burden comes as the auto industry faces huge investments to develop self-driving features and expand electric cars to comply with tightening emissions regulations.

Over the next five years, the German auto giant plans to invest about €9bn on battery-powered and hybrid cars triple its previous spending level.

Even with the improved first-quarter performance, VW stuck to its 2017 forecast of a 6% to 7% operating return on sales, warning that "challenges will arise particularly from the economic situation, intense competition in the market, exchange rate volatility and the diesel issue."